China says slow and steady wins the race

In its quest for stability, the Chinese government tends to avoid surprises. That makes for few radical policy changes and the government usually serves up economic data in line with consensus forecasts.

Not so on Monday, when growth in the first quarter unexpectedly slowed to 7.7 per cent. The market was understandably spooked by the number and appears equally confused about the official statement which accompanied the release.

The National Bureau of Statistics, which trots out the government line every quarter, said the Chinese economy had “stabilised".

But crucially it made no mention of “continuing to support growth" or maintaining “proactive fiscal policy" or “prudent monetary policy".

The market likes to see such buzz words as it suggests the government will keep spending money in an effort to maintain growth at elevated levels.

That no longer appears the case and could suggest China’s new leadership is happy to let growth slide back towards 7.5 per cent, which is the official target for 2013.

That would be lower than last year’s growth rate of 7.8 per cent, which was the weakest since 1999.

“The government does not appear as worried about the deceleration in growth as it has on previous occasions," said
Alaistair Chan
from
Moody’s Analytics
.

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The official Xinhua news agency also made note of the 2013 economic growth target in the second line of its report on Monday.

This suggests China’s new economic leadership led by Premier
Li Keqiang
is going to begin the long task of changing the drivers of growth in the world’s second-biggest economy. The last paragraph of the NBS statement certainly supports such a view.

It called for “improving macro regulation, strengthening reform and innovation and optimising government functions".

This notable change in language comes just a month after Premier Li and President
Xi Jinping
officially completed China’s once-in-a-decade power transition and assumed the country’s top two roles.

While mining companies and commodity investors would like to see China again pump up its economy, this is not a long-term solution.

Indeed, it would only make the country’s problems worse. So it should be seen as a good thing that the new economic leadership is happy to let growth slow to a more moderate and, hopefully, sustainable level.

Such an approach is long overdue and should see a focus on the quality of growth rather than the headline number, but it’s going to be a delicate balancing act. The biggest issue is the rapid expansion of lending and how best to slowly deflate a credit bubble which has formed in recent years.

If the government puts the brakes on too hard, the shock to an already fragile economy could cause growth to dip well below forecasts.

As Moody’s pointed out, China’s economy grew at 1.6 per cent quarter on quarter, which implies an annual rate of just 6.7 per cent for the year.

That means growth needs to accelerate in the second half if the government is to meet its target.